Trust, Social Capital, and the Bond Market Benefits of ESG Performance

Abstract

We investigate whether a firm’s social capital, and the trust that it engenders, are viewed favorably by bondholders. Using firms’ environmental and social (E&S) performance to proxy for social capital, we find no relation between social capital and bond spreads over the period 2006-2019. However, during the 2008-2009 financial crisis, which represents a shock to trust and default risk, high-social-capital firms benefited from lower bond spreads. These effects are stronger for firms with higher expected agency costs of debt and firms whose E&S efforts are more salient. During the crisis, high-social-capital firms were also able to raise more debt, at lower spreads, and for longer maturities. We find no evidence that the governance element of ESG is related to bond spreads.

Keywords: ESG, CSR, sustainability, social capital, trust, corporate bonds, bond spreads, agency costs of debt, financial crisis.

JEL Classification: G12 G21 G32 M14.